The Bombay High court held that the profit element embedded in purchases would be subjected to tax and not to the entire amount.
The division bench comprising Justices Milind N Jadhav and Ujjal Bhuyan was considering an appeal filed by the department against the order of the Mumbai ITAT.
Assessee is a company which is engaged in the business of manufacturing and dealership of all kinds of industrial power controlling instrument cables and related items. For the assessment year, 2010-11 assessee filed e-return of income declaring income of Rs.1,35,31,757.00.
In addition, the assessee also declared an income of Rs.3,64,15,007.00 under Section 115JB of the Act. The case was selected for scrutiny and in scrutiny, proceedings wherein Assessing Officer noticed that the Sales Tax Department, Government of Maharashtra had provided a list of persons who had indulged in the unscrupulous act of providing bogus hawala entries and purchase bills.
The Assessing Officer noticed that the assessee was one of the beneficiaries of such bogus hawala bills. The Assessing Officer referred to purchases allegedly made by the assessee through four hawala entries for the assessment year under consideration and disallowed the entire expenditure shown as incurred by the assessee amounting to Rs.24,18,06,385.00.
On first appeal, the first appellate authority held that there can be no sales without purchases. When the sales were accepted, then the corresponding purchases could not be disallowed.
On second appeal, the Tribunal took a the view that 2% of the profit which was directed to be added by the CIT (A) was on the lower side and therefore, the Assessing Officer was directed to make further addition of 3%.
The High Court bench observed that it was an admitted fact that the Assessing Officer did not object to the sales made by the assessee and examined books of accounts of the assessee wherefrom it was found that the assessee had made payments on account of the purchases through account payee cheques and the purchases were entered in its books of account and find no error or infirmity on action taken by tribunal.
In the light of the judgment of Gujarat High Court in Bholanath Polyfab Limited, the Court upheld the finding of the Tribunal and held that whether the purchases were bogus or whether the parties from whom such purchases were allegedly made were bogus was essentially a question of fact. When the Tribunal had concluded that the assessee did make the purchase, as a natural corollary, not the entire amount covered by such purchase but the profit element embedded therein would be subject to tax.